Currency traders are pondering whether the U.S. dollar has lost its luster as a haven currency a day after the Federal Reserve's surprise decision to effectively print money in a bid to jumpstart the U.S. economy.
The dollar remained on the defensive against major counterparts Thursday. The currency was in consolidation mode after plunging sharply the previous day in the wake of the Fed's announcement that it would buy $300 billion worth of U.S. government debt in coming months. See full story.
Since last fall, the dollar has generally benefited from de-leveraging and repatriation as traders fled riskier assets. The relationship appeared to weaken in recent weeks but remained intact.
The Fed's decision to begin a more aggressive phase of quantitative easing doesn't necessarily mean the end of its haven status, said Russell Jones, head of fixed income and currency strategy research at RBC Capital Markets.
"Some of the central banks that have been reluctant to go down this path may now be less reluctant to do so," Jones said.
That includes the Frankfurt-based European Central Bank. ECB President Jean-Claude Trichet has acknowledged studying additional "unconventional" measures, but has appeared reluctant to back quantitative easing measures such as those announced by the Fed on Wednesday and the Bank of England earlier this month.
Stephen Gallo, head of market analysis at Schneider Foreign Exchange, said the move doesn't spell the end of the dollar's ability to rise on economic and financial turmoil, but does mark the start of a more level "playing field" now that the Fed has joined the BOE, the Bank of Japan and other central banks in monetizing debt.
"We feel that the period of aggressive dollar strength is quickly coming to an end, but it doesn't mean that the positive correlation between the dollar and risk aversion is no longer in play -- although it will be interesting to see in future sessions just how much the dollar strengthens when equity markets slide," Gallo said, in a research note.
The Fed move has also boosted risk appetite, lifting equities and contributing to the greenback's weaker tone.
The dollar index , a measure of the greenback against a basket of major currencies, traded at 84.012, down from 84.184 in late North American trade Wednesday. The index had traded at 86.471 shortly before the Fed's announcement Wednesday.
The euro rose to $1.3504, up slightly from $1.3494. The euro had changed hands near $1.3105 before surging to its highest level versus the dollar since January after the Fed move Wednesday.
Quantitative monetary easing policy carries out monetary easing by using money supply rather than interest rates as its main tool. The benefit of this policy is that more funds can be supplied, even after official rates fall to zero, thereby expanding monetary easing further. The Bank of England, the Bank of Japan and the Swiss National Bank have all adopted it to varying degrees, putting pressure on their respective currencies.
Economists at KBC Bank in Brussels said the Fed's actions will likely keep the euro supported versus the greenback.
"Quantitative easing and artificially low interest rates, in theory are no support for a currency, especially not for the currency of a country with an external deficit," they wrote.
The dollar traded at 95.54 Japanese yen, down 96.18 yen late Wednesday and from 98.29 yen ahead of the Fed news.
The British pound rose to $1.4346 against the dollar, up from $1.4293 late Wednesday and $1.3988 shortly before the Fed's announcement.
